Indonesia Grapples with Business Backlash Over Tax Hike Ahead of 2024 Presidential Election

Maulana Yusran, Secretary General of the Indonesian Hotel and Restaurant Association (PHRI), expressed frustration, stating that the timing of the tax hike hindered the industry’s recovery from the pandemic.

As Indonesia prepares for its upcoming presidential election, the government’s recent and potential tax hikes have triggered a wave of discontent among businesses, particularly in the leisure and tobacco industries. The move comes at a challenging time for the nation, still grappling with the economic aftermath of the Covid-19 pandemic.

Last month, a significant increase in the leisure tax for nightclubs, bars, spas, and karaoke clubs raised concerns within the business community. The tax rate surged to at least 40% up from as little as zero, with a ceiling set at 75%. Local governments, especially in popular tourist destinations like Bali and Yogyakarta, now have the authority to determine the specific rate within this range, potentially impacting the competitiveness of Indonesia’s tourism industry.

Maulana Yusran, Secretary General of the Indonesian Hotel and Restaurant Association (PHRI), expressed frustration, stating that the timing of the tax hike hindered the industry’s recovery from the pandemic. With neighbouring countries such as Thailand, Malaysia, and Singapore already popular among tourists, the increase in prices could divert travellers to other destinations, undermining Indonesia’s efforts to boost its tourism sector.

This leisure tax escalation follows closely on the heels of a 10% to 15% increase in excise taxes for cigarettes and e-cigarettes, causing apprehension among producers like Gudang Garam and HM Sampoerna. Indonesia, known for having one of the highest smoking rates globally, faces challenges as consecutive years of tax hikes threaten to impact sales and company stocks.

Adding to the concerns is the impending hike in the value-added tax, set to increase to 12% from 11% by January 1, 2025, according to the 2021 law on tax harmonization. Meanwhile, the expiration of income tax discounts for micro, small, and midsize enterprises (MSMEs) further compounds worries for businesses, potentially affecting their competitiveness.

Attempting to address the concerns of MSMEs, the tax office clarified that there would be no increase in tax rates for this sector. However, the return rates after the discount period ends raise uncertainties for these enterprises, prompting fears of increased financial burdens.

In response to the backlash, Tourism Minister Sandiaga Uno announced the cancellation of the tax hikes last week. However, industry associations, including the PHRI and the Indonesian Tourism Industry Association, are proceeding with plans to file a judicial review against the leisure tax hike. The uncertainty surrounding regional administrations’ adherence to the cancellation has prompted the associations to pursue legal avenues.

The government’s broader economic policies are also under scrutiny, with a plan to promote electric vehicles by disincentivizing internal combustion engine vehicles sparking public outcry. The government’s intention to raise taxes on conventional motorcycles adds another layer of concern, potentially impacting both consumers and the automotive industry.

Luhut Pandjaitan, coordinating minister for maritime affairs and investment, highlighted the government’s commitment to environmental initiatives during the launch of Chinese EV giant BYD’s electric cars in Indonesia. However, the move to increase taxes on conventional motorcycles has raised questions about the overall impact on the nation’s transportation sector.

Amid these tax hikes, the government faces challenges in meeting its target of an 8% increase in tax revenue to 2,309.9 trillion rupiah in 2024. Declining windfalls from exports of key commodities, including palm oil, coal, and nickel, have led to a need for domestic revenue sources.

Bhima Yudhistira, director of the Center of Economic and Law Studies, believes that the tax increases are geared toward financing populist policies ahead of the presidential election. Those policies include the first pay rise for civil servants in five years and various social safety net programs, indicating a cyclical pattern coinciding with national elections every five years.

The significant increase in Indonesia’s social protection budget for 2024, amounting to 496.8 trillion rupiah, reflects the government’s commitment to populist spending. However, Yudhistira warns that such measures could burden businesses and impact the middle class, potentially leading to lower economic growth if fiscal policy distortions persist.

As Finance Minister Sri Mulyani Indrawati faces pressure to finance these populist programs and amid rumoured disagreements with Defense Minister Prabowo Subianto, speculation about her potential resignation has emerged. The uncertainty surrounding economic policies and taxation raises questions about Indonesia’s economic trajectory in the coming years, with businesses closely monitoring developments as the presidential election approaches.